Chemours – This Time Teflon Could Stick! – Implications for DuPont, Bye Bye Apollo

gcopley

 

This is likely a day of real schizophrenia for Chemours. On the one hand you have a rumored bid (Bloomberg) from Apollo. On the other hand you have the loss of the first Teflon related law suit – we will focus on the latter, and we suspect that Apollo will today also!

Last night Chemours lost its first trial over the possible toxic effect of a precursor to Teflon. The ruling is that the chemical contributed to or caused the cancer in the plaintiff in Columbus Ohio as a consequence of DuPont leaking PFOA into the drinking water supply near the plant:

  • The chemical has been linked to 6 possible types of diseases/cancers
  • There were no punitive damages awarded – the jury deciding that the leak was an accident and not in any way malicious
  • The plaintiff was awarded $1.6 million – Chemours will appeal – but…
  • There are 3500 plaintiffs (according to Reuters)

We are reminded in this instance of asbestos and the impact that it had on the industry 15 years ago, causing a number of bankruptcies and huge payouts. Companies initially played down the risks, but ended up paying significant amounts of money. This is a localized, smaller scale problem, and focused only on Chemours, but the possible consequences for CC and for DD are significant. Apollo is likely to run away as quickly as it appeared yesterday if this has legs.

If all Plaintiffs succeed in matching the first award, the cost to CC would be in excess of $5bn, a number that the company could not afford and should this look likely, CC would be forced to seek bankruptcy protection through a chapter 11 filing. While possible, this gross estimate of liability is unlikely for 2 reasons:

  1. The lawyers will have tried the easiest case first – it is unlikely that all of the rest are straightforward
  2. Chemours, and likely DuPont, will appeal and may end up with a much reduced ruling

Things could get much worse if punitive damages appear in another case, but this one will likely be used successfully by CC and DD as a precedent. That said, the companies may be forced down a bad path of least resistance – settling (for a high number) rather than risk the possible punitive outcome.

In past actions around asbestos, companies like Union Carbide were able to set aside “war chests” to pay fines and to pay for litigation – these were substantial charges against earnings and the stock reacted each time the liability grew. Companies without cash flows ended up in Chapter 11, like WR Grace. Chemours has no cash and could not create a war chest.

If this begins to look like a real risk, a fraudulent conveyance case against DuPont is inevitable and the liability will extend to DuPont in one form or another.

For perspective, if the liability was as much as $5bn – that would be more than 25x CC’s expected 2015 free cash flow and is currently almost 4x CCs market cap.

The same liability is 10% of DD’s market cap and 1.6x expected 2015 free cash flow.

This is a major problem for CC, although it is probable that DD would be forced to rescue CC before bankruptcy, and accordingly it is tough to judge how low the stock could go – it could even go up!

This could be a big bump in the road for DD, but would not change the ultimate path and potential of the company with the right leadership – see recent research.

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